Which sectors spring forward?
BY ELIZABETH TROTTA, SMARTMONEY — 03/19/10
Saturday marks the first day of spring, and if history is any indication, the stock market is ready to bloom.
Winter’s Santa rallies and the January Effect may garner more attention, but spring is an unusually bullish season for stocks. Over the last 30 years, the S&P 500 index (.SPX) has climbed an average of 1.8% in April and 1.5% in May, making that stretch the best back-to-back months of the year — outperforming even the typical rallies of November and December.
Recently, those hefty returns have stretched into a third month. Over the past 10 years, the three-month period from March through May has yielded by far the strongest results for stocks and ETFs, says Ryan Detrick, chief technical strategist at Schaeffer’s Investment Research.
Of course, these effects are often dwarfed by larger economic trends and analysts warn against putting too much faith in the position of earth relative to the sun. For example, “last year’s rally helped strengthen the seasonal averages,” Detrick says.
Still, market watchers agree there are real cyclical patterns in seasonal trading. Investors who exited stocks after the holidays may spot more lower valuations in the spring – at least in some sectors. “You get a dip in January and February,” says Marc Pado, U.S. market strategist at Cantor Fitzgerald. “You come down, you hit a low, and then you see there’s an opportunity to jump in and then they move back into the sectors.”
SmartMoney wanted to find out which sectors perform best during the spring, so we gathered the monthly returns of 12 sectors for the past decade and crunched the numbers ourselves. Here’s what we found.
Business services and consumer services were the best-performing sectors for the most spring months (March, April and May) over the last 10 years. The industrials sector was a close second. And energy performed well, too.
Why are business services a springtime buy? Let’s take a closer look at the sector. It’s made up of employment services, services to buildings and dwellings and office administrative services. Analysts say those kinds of businesses benefit during the spring because they’re most likely to be undervalued in late winter.
“February is a tough month for those groups because you get IT spending in Q4, and all the good stuff is baked into the stock — then you come back down after earnings come out,” says Pado. Essentially, he adds, “February is a correction, so what you’re doing is you’re balancing off of a seasonal low – anything business, IT services-related will do something like that.” The effect is probably the strongest in years marked by good economic performance as well, says Pado.
Take Automatic Data Processing , for example. The payment processing firm rose 8.9% in March through May of 2008, 12% during the period in 2009, and is up 8% so far this March. ADP also declared a dividend on March 10 of this year, for 34 cents. Paychex is up more than 8% already in the month of March.
Like business services, consumer services leans on the fourth quarter, says Pado. So there, too, a pullback in January and February leads to an eventual opportunity in the spring.
Industrials also show a spring boom, which some market watchers say is unexpected. The bump could be the result of companies assessing the need for inventory, choosing to deplete leftover holiday inventory into the first quarter, and then starting to rebuild in the second-quarter spring months, says Pado. “There are always seasonal tendencies — just like you buy retail in September.”
Not every sector appears to enjoy the spring effect. Among our 12 sectors, utilities were the worst monthly performer, posting the weakest results of any sector in seven out of the 30 months we tracked. They may be victims of portfolio adjustments, says Doug Roberts, chief investment strategist for ChannelCapitalResearch.com. “If you’re going into a riskier trade, then you dump the less risky — so utilities versus consumer, it’s the flip side of the coin,” he says. “Utilities are pretty viewed as less risky, and all the sudden they think they can go into something with more zip.”
The spring also brings sector rotations that follow distinct patterns, says Roberts. “In the old days they used to look at crop reports, and you’d see bumps. You also see that in January, because you’re rebalancing, you tend to have a little pop in small stocks that can continue for a while.”
Another explanation could be the tax trade, says Roberts. “They sell the losers tax-time, and then people rotate back into them.”
And then there’s the weather. Everybody always buys utilities going into winter, says Pado. “I always laugh when there’s a cold spell in the East Coast, then you get this pop in the energy stocks and crude just because you have that cold weather. It’s as if you didn’t know it was going to come – yes, you get exceptional stuff like the snow that we had this year — but even a mild cold spell, it still seems to come as a shock.” When winter is over, so is that trade.